Budgeting is a method for gaining better control over the money coming in and going out of your business (cash inflows/cash outflows). While most look at budgeting as a daunting task, it should be an exciting step towards wealth creation. Below are a few quick tips on what you should keep in mind when building a budget (or creating wealth) for your business and ultimately yourself:
Create budget benchmarks with industry information
In seeking to reduce your operating expenses for your small business, it is helpful to know what other companies in your industry may be spending in certain areas. This allows you to make a more informed decision about how to cut costs and lets you know if your objectives are reasonable given your industry. For instance, you may want to cut payroll costs down to 30% of your revenue from 50%. However, if similar sized businesses in your industry average 50-60% in payroll costs, it may be unreasonable for you to make such drastic reductions in your payroll costs without affecting the efficiency and/or way your company delivers its’ service offerings. Furthermore, there could be legal reasons why the cost may average 50-60%, maybe minimum wage laws are playing a significant role or other regulations that may affect your industry. Do your homework and try to obtain a benchmark for your budgeted costs as best as possible.
Consider Income Tax Rates
Depending on the business structure you have, the tax you pay on the profits your business generates must be considered when budgeting. There were a host of new tax laws that took effect for 2018-2025 that affects most business structures. So, be sure to involve your Tax Advisor in your budget planning to avoid a tax bill at the end of the year that could greatly reduce the cash you thought you had available for wealth building. A great goal would be to keep your tax rate at 20% or less of your gross income.
Create "Savings Buckets"
There may be multiple goals you are seeking to achieve and that are the primary reasons why you must set aside some of your profits. For instance, you may want to set aside money for professional development, purchasing a new office building, etc. Having your savings separated into various goal categories allows you to easily see how close you are to meeting them and deters you from using these savings for day to day business operations.
Recall the reason why you are budgeting – to turn your income into cash! This cash can then be used to create a higher lifestyle, acquire assets that generate passive income or to increase your liquidity. Whatever you choose, be sure to put careful thought into ways you can get the most out of the income your business earns.
Other topics business owners found interesting are:
New Tax Rules for Meals and Entertainment
How To Properly Classify Employees vs. Contractors
